Argentina’s debt ‘situation’ has been a hot topic in the news. Recently the country showed signs of reaching some middle ground with its debt holders rather than defaulting on it. The Manhattan court has ordered Argentina to put $1.3 billion in an escrow account and pay off the creditors that include US hedge funds.

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For the sake of background, Argentina has been embroiled in a legal standoff with a bunch of hedge funds, sometimes dubbed as ‘vultures funds’, that refused to take part in the previous debt restructuring and have held out on $24 billion in bonds.  In 2001, the country was at the brink of defaulting on $100 billion in foreign debt.  About 93 percent of the creditors agreed to punitive restructurings while the rest of the bondholders including, Elliott Management, decided to battle it out and the case has been running in court for several years now.

In previous statements released by the Argentine government, the President has vowed that they will not pay one dollar to the vulture funds. However the recent ruling will not allow the country such freedom. On the other end, Elliott Management used harsh but unsuccessful ways to extort the money from Argentina. In late October, NML Capital (a subsidiary of Elliott Management)  convinced the Ghanian government to seize an Argentine Navy training ship while it was docked in Ghana. This is also not the first time NML Capital has tried to impound Argentine assets, previous targets have been national bank assets, a satellite, a private jet and others.

The recent ruling may serve as a good tiding for creditor rights but it is an unfavorable outcome for the sovereign bond markets. If the Manhattan ruling serves as precedent then it can embolden other hedge funds which are on the lookout for defaulting countries. Elliott has exploited the clause in US law which requires the bankrupted companies to pay the lenders equally and at the same time. By that logic, Argentina cannot keep paying the holders of the restructured debt and continue to ignore the proud vulture funds. Argentina could very well take the appeal to Supreme Court but the time lapse will be crucial and the country will likely default when it does not pay the previous exchange holders, as per the court verdict.

In the aftermath of the Manhattan ruling, Fitch ratings has cut Argentina’s sovereign debt rating with a CC for international law bonds and B- for Argentine law bonds. Fitch expects the country to default on its bonds.